The Texas Supreme Court has held that the insured-versus-insured exclusion in a D&O policy precludes coverage for a claim asserted by the insured’s fidelity insurer, under an assignment of rights from the insured, against a former director of the insured.  The court reversed the holding of the intermediate court of appeals and reinstated the trial court’s entry of summary judgment for the D&O insurer on the basis that it owed no duty to defend the former director.  Great American Ins. Co. v. Primo, 2017 WL 749890 (Texas Feb. 24, 2017).

The insured condominium association filed a claim with its fidelity insurer after a director wrote two checks to himself for just over $100,000 shortly before resigning.  The fidelity insurer paid the claim in exchange for a written assignment of all of the insured’s rights and claims against the former director for the loss.  When the fidelity insurer sued the former director to recover the funds, the director demanded that the insured’s D&O insurer provide a defense.  After the fidelity insurer nonsuited its claims against the director, the director sued the D&O insurer to recover the defense costs and attorneys’ fees he incurred in the suit brought by the fidelity insurer.  The D&O insurer moved for summary judgment, arguing that the former director had already collected his defense costs through indemnification and arguing that the insured-versus-insured exclusion in the D&O policy precluded coverage. The trial court granted the D&O insurer’s motion for summary judgment based on the insured-versus-insured exclusion, but the intermediate court of appeals reversed.

Reversing the intermediate court of appeals, the Texas Supreme Court held that the suit by the fidelity insurer fell within the plain language of the insured-versus-insured exclusion.  The exclusion in the D&O policy provided that no coverage was available for “any Claim made against any Insured by, or for the benefit of, or at the behest of [the insured] or . . . any person or entity which succeeds to the interest of [the insured].”  The Supreme Court held that the intermediate court of appeals erred in applying a narrow definition of the term “successor” from a corporate transactions context to determine whether the fidelity insurer “succeed[ed] to the interest of the insured.”  According to the court, that specialized use of the term “successor” is distinct from its use in the context of the insured-versus-insured exclusion and from its plain meaning, noting that this was in accord with the holdings of other courts.  The Supreme Court also noted that the holding of the intermediate court of appeals would make collusive suits more likely, because an insured could simply assign its claim to a third party to avoid the exclusion in the policy.  For these reasons, the court reversed, and rendered judgment for the D&O insurer.